Modelling gold futures: should the level of speculation inform our choice of variables?

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Abstract

Prior literature provides conflicting evidence about the impact of speculation on gold futures returns, volatility, and the relationship between market fundamentals and prices. In this paper, we exploit trade volume information to determine the most appropriate family of factors to adopt when modelling gold futures. Using the Disaggregated Commitment of Traders report, we find that extreme levels of speculation are informative in that they signify a shift in the relative modelling accuracy of macroeconomic and latent factors. A simple composite prediction framework, incorporating the changing level of speculation, empirically demonstrates the uncovered phenomenon and offers improved predictive accuracy for gold futures prices. Furthermore, our findings are shown to be robust to alternative latent and macroeconomic model specifications. 
Original languageEnglish
Pages (from-to)966-977
Number of pages12
JournalEuropean Journal of Finance
Volume25
Issue number10
Early online date17 Dec 2018
DOIs
Publication statusEarly online date - 17 Dec 2018

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